ENERGY AND ENVIRONMENT PARTNERSHIP WITH CENTRAL AMERICA

CENTRAL AMERICAN CARBON FINANCE GUIDE

Project Proposal

Central American Carbon Finance Guide

(regional)

GreenStream Network Oy (GSN)

Biomass Users Network - Centroamérica (BUN-CA)

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INDEX

Index..................................................................................................................................................... 2
Executive Summary..............................................................................................................................3
1Context............................................................................................................................................... 3
2General Objective............................................................................................................................... 4
3Expected Outcomes............................................................................................................................ 4
4Activities, organization and project management.............................................................................. 5
4.1Activities......................................................................................................................................5
Activity 1. Market review.................................................................................................................5
Activity 2. Compilation of the requirements for bankable project proposals and description of the
CDM-project cycle........................................................................................................................... 5
Activity 3. Review of the markets for carbon credits and renewable certificates from small-scale
renewable energy projects................................................................................................................ 5
Activity 4. Preparation of the Central American Carbon Finance Guide......................................... 6
4.2Organization................................................................................................................................ 6
4.3Project Management.................................................................................................................... 6
5Costs and financing............................................................................................................................ 7
6Schedule............................................................................................................................................. 7
Annex................................................................................................................................................... 9

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EXECUTIVE SUMMARY

Several of the projects under preparation within the framework of the Partnership will reduce
greenhouse gas emissions. The capitalization of this climate benefit can improve the profitability of
the projects and guidance is required on how to take the climate aspect into account in the project
development. The objective of this project is to help project developers understand how to prepare
bankable small-scale renewable energy project proposals and how to benefit from the emerging
international carbon markets through CDM or other international greenhouse gas or renewable
energy certificate schemes.

The principal outcome of the project is the Central American Carbon Finance Guide. The guide
will briefly discuss important issues related to bankable project proposals, possible sources of
finance and national circumstances relevant to small-scale renewable energy projects in Central
America. It will provide practical guidance on the preparation of CDM projects and act as a
reference manual facilitating project developers in finding the right sources of information.

1 CONTEXT

The main objective of the Energy and Environment Partnership is to promote the use of renewable
energy sources and clean technologies in Central America in a sustainable manner, and to make
energy services more accessible to the poor, particularly to those in rural areas. Several of the
projects under preparation within the framework of the Partnership will reduce greenhouse gas
emissions. The capitalization of this climate benefit can in some cases significantly improve the
profitability of the projects. This calls for clear guidance on how to include the climate aspect in the
project preparation and implementation from the outset.

The international markets for greenhouse gas emission reductions and renewable electricity
certificates are fragmented. So far, the market for Kyoto Protocol’s Certified Emission Reductions
(CERs) has been dominated by few players (e.g. World Bank’s Prototype Carbon Fund and the
Cerupt programme of the Government of the Netherlands). New market entrants are rapidly
changing the picture, however. Different governmental programs, such as the CDM/JI Pilot
Programme of the Finnish Government, as well as growing participation by private companies are
making the market more complex and increasingly competitive. Especially the European Emissions
Trading Scheme which will start on 1st January 2005 and the proposal of the European Commission
to link CDM with the scheme is likely to change the international carbon market significantly.
Furthermore, various non-Kyoto systems, such as renewable energy certificate schemes, voluntary
initiatives (e.g. Chicago Climate Exchange) and U.S. state-level regimes, make the situation even
more complicated. A great deal of knowledge and understanding is required from the project
developers if they wish to maximize the carbon benefits for their projects.

On the other hand, carbon finance does not convert a bad project into a good one. Carbon finance
can improve the profitability of a project that is sound, sustainable and well structured in its own
right. Many good ideas are not realized as projects because there is a lack of capacity to develop
bankable project proposals. This is especially true when it comes to small-scale renewable energy
projects. In an ideal situation, a good concept can be developed into a bankable and solid project
proposal and carbon finance is used to further improve the feasibility of the project.

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Many Central American initiatives, including FOCER (Strengthening of the Capacity for
Sustainable Development in Central America) and FENERCA (Financing Renewable Energy
Enterprises in Central America) have prepared guidebooks on renewable energy projects,
calculation of emission reductions and project finance. In addition, The Ministry for Foreign Affairs
in Finland and Finpro have recently prepared a general investment guide “Financing Business
Opportunities in Latin America and the Caribbean”. The Central American Carbon Finance Guide
proposed here will complement the former initiatives by providing specific guidance on the
preparation of bankable project proposals and on the use of carbon finance for renewable energy
projects in Central America.

In the Finnish Partnership meeting in March 2003, Pohjolan Voima Oy and other members of the
Partnership expressed a need for a guide on how to ensure that greenhouse gas emission reductions
generated by projects in Central America fulfill international requirements and can thus be
capitalized. This guide is intended to help both Central American and Finnish project developers to
reduce risks and maximize their benefit from the emerging international carbon and renewable
energy certificate markets.

2 GENERAL OBJECTIVE

The development objective of the proposed project is to strengthen the small-scale renewable
energy project portfolio in Central America. It is expected that this project will increase the number
of successful small-scale renewable energy projects utilizing carbon finance (e.g. CDM projects)
implemented in the region and further improve the competitive position of the Central American
countries in the international carbon markets vis-à-vis other world regions.

The general objective of this project is to help project developers understand how to prepare
bankable small-scale renewable energy project proposals and how to benefit from the emerging
international carbon markets through CDM or other international greenhouse gas or renewable
energy certificate schemes.

3 EXPECTED OUTCOMES
The principal result of the project is The Central American Carbon Finance Guide. The guide
will briefly explain the key elements of a bankable project proposal, give basic information about
the banks, funds and other institutions that are actively involved in project development or finance
in the Central American isthmus, outline the national circumstances in each of the seven countries
regarding renewable energy issues and the Kyoto Mechanisms, provide practical guidance on how
to include the climate aspect in the project preparation from the outset while minimizing CDM-
related risks and give basic information about the international carbon and renewable energy
certificate markets.

It is not the intention of the project participants to duplicate any work already done on these issues
in Central America. Rather than reinventing the wheel, the guide will act as a reference manual
facilitating project developers in finding the relevant information.

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4 ACTIVITIES, ORGANIZATION AND PROJECT MANAGEMENT

4.1 Activities

Activity 1. Market review

The market review was initiated during the Partnership meeting held in Panama on June 18-19,
2003. A brief review per country will be carried out within the study area (Belize, Costa Rica, El
Salvador, Guatemala, Honduras, Nicaragua and Panama) on the following issues:
• Status of the electricity market: which businesses are open for competition, the biggest electricity
producers and their ownership structure (private/public), electricity and power consumption (current
and national forecast) and consumer price level (industry/ households);
• Electricity production technologies (current production capacity per technology type), major energy
projects that are in the planning phase (publicly known significant investments in energy production);
• Means of promoting renewable energy sources and rural electrification (investment subsidy,
production subsidy, tax exemption, feed-in tariff);
• Review of government institutions, commercial and development banks, project developers, funds,
NGOs and other institutions active in the region participating in small-scale renewable energy
projects;
• Review of existing CDM, GEF and other climate-related projects; and
• National implementation of the Kyoto Protocol in each country (CDM rules, responsible authorities)
The expertise of BUN-CA will be employed in compiling information for this task. Information
from public sources and interviews as relevant will be used. References to existing information will
be provided when possible.

Activity 2. Compilation of the requirements for bankable project proposals and description of the CDM-project
cycle

This task assess and compiles the key requirements to prepare bankable renewable energy project
proposals, as well as the specific requirements related to the CDM project cycle. Specific
requirements beyond the basic CDM-project cycle of the World Bank’s Prototype Carbon Fund
(PCF), Dutch Cerupt programme, Finnish CDM/JI pilot programme, EC’s emissions trading scheme
and other programmes as relevant, will also be considered.

This task is implemented through a desk study of relevant literature, and references to existing
information sources will be provided, as relevant.

Activity 3. Review of the markets for carbon credits and renewable certificates from small-scale renewable
energy projects

In order to benefit from the emission reductions, the project owner needs to engage in the markets
on which these are traded, either directly or indirectly through an intermediary. This task will
present a review of likely buyers and sellers of emission reductions and the expectations on the price
level until 2012 based on the expertise of GreenStream Network in the international carbon market.

A review will be made of small-scale renewable energy CDM projects that have been implemented
or are being planned within the framework of the PCF, Cerupt, the Finnish CDM/JI pilot
programme and other relevant initiatives. Data on project type, status, emission reduction and price
will be collected to the extent the organizations administering the programs makes the information
available.

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The links of carbon credits from CDM-projects to the emissions trading directive suggested by the
Commission of the European Communities, the links between emission reductions and renewable
energy certificates and non-Kyoto carbon offset schemes will be briefly discussed.

The risk related to the climate benefit value of CDM-projects in Central America will be analyzed
from the investor’s point of view.

Activity 4. Preparation of the Central American Carbon Finance Guide

Based on the outcome of Activities 1-3, the Central American Carbon Finance Guide will be
elaborated. The guide will explain the key elements of a bankable project proposal, give basic
information about the banks, funds and other institutions that are actively involved in project
development or finance in the Central American isthmus, outline the national circumstances in each
of the seven countries regarding renewable energy issues and the Kyoto Mechanisms, provide
guidance on how to include the climate aspect in the project preparation from the outset and give
basic information about the international carbon and renewable energy certificate markets.

The guide will give pragmatic advice to the investor on how to prepare a bankable project proposal
and how to evaluate and ensure eligibility of emission reductions from the project and minimize
regulatory and other risks. The idea is that the guide can be used as a quality management procedure
in renewable energy CDM projects. The guide will also provide advice on how to capitalize eligible
carbon credits in the international carbon market.

Comments from the Partnership will be invited for the draft version of the guide before finalizing it.
The guide shall be distributed in the Central-American countries and in Finland through authorities
and other relevant institutions. Apart from the printed guide, an easy-to-update online version will
be available through BUN-CA and GSN websites. The translation, printing and distribution costs
are not included in the budget of this proposal.

4.2 Organization
The project will be implemented by GSN and BUN-CA. PVO will be a project sponsor and it will
revise the draft guide. PVO’s participation in the project is most important as it will provide
valuable input to the project from the viewpoint of a potential CDM investor.

BUN-CA, under a subcontract from GSN, will be responsible for the compilation of the relevant
information from the seven Central American countries and preparing the market review described
in activity 1 of the project. GSN will have the overall responsibility of the project and it will report
to the sponsors (PVO and the Partnership). GSN will implement the tasks related to the
international carbon market and the general CDM requirements.

4.3 Project Management

GSN acts as the project leader. Mr. Tommi Tynjälä, GSN’s Executive Vice President, will be the
responsible project leader. Mr. Leonel Umaña will be responsible for the tasks belonging to BUN-
CA. GSN and BUN-CA will co-operate closely in the implementation of the project.

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5 COSTS AND FINANCING

In the original proposal, EUR 43,000 was sought from the Partnership and the total budget of the
project was EUR 52,500. The Steering Committee approved a EUR 25,000 contribution from the
Partnership and the scope of the project had to be adjusted accordingly.

According to the new budget, the total cost for the project is EUR 36,760, out of which EUR 25,000
is sought from the Partnership. PVO will contribute EUR 2,500. The rest is in-kind contributions
from GSN and BUN-CA, including the costs incurred from GSN’s participation in the Panama
workshop at own cost.

Due to smaller contribution from the Partnership than in the original proposal, project partners’
relative contribution to the project has been raised from 18% to 32% of the total budget. Some
changes to the scope of the original proposal were nevertheless necessary. The guide will be based
to a great extent on existing material providing when possible references to them rather than
including complete descriptions. Also, some chapters of the guide will be written in Spanish and
some in English, as opposed to a complete English version originally considered. It is expected that
in order to maximize the benefits from the project, complete English and Spanish versions will be
elaborated and distributed by the Partnership. The translation, printing or distribution costs are not
within the scope of this project, however.

The following table presents the detailed budget estimate for the project. The costs are exclusive of
VAT or any other taxes, duties, bank charges or similar fees.

Detailed Costs Estim ate of the Project

Contributions
Unit Unit Cost GSN * BUN-CA * PVO Partnership Total
Professional Services Days
Projec t Financ e Ex pert 15 750 250 - 1,500 9,500 11,250
CDM Spec ialis t 19 750 3,750 - 1,000 9,500 14,250
Loc al Cons ultants 18 450 - 2,100 - 6,000 8,100
Adminis trative Support 6 100 300 300 - - 600
SUBTOTAL 58 4,300 2,400 2,500 25,000 34,200
Travel Persons
Travel + ac c omm+DSA 1 n/a 2,060 - - - 2,060
SUBTOTAL 1 2,060 - - - 2,060
Office Num ber
Comm. & other offic e 2 250 250 250 - - 500
SUBTOTAL 2 250 250 - - 500
Subtotal 6,610 2,650 2,500 25,000 36,760
Contingencies 0% - - - - -
TOTAL 6,610 2,650 2,500 25,000 36,760
18.0 % 7.2 % 6.8 % 100.0 %
Partners hip 68.0 %
* GSN and BUN-CA contributions are in-kind. Partners 32.0 %
100.0 %

6 SCHEDULE
Some preparatory work has already been done by GSN and BUN-CA. The outline of the guide will
be presented in the Belize workshop on 23 October 2003. The draft guide is expected to be ready by
the end of December 2003. The final version will be ready one month after the receipt of the last
comments from the Partnership.

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ANNEX

PARTICIPANTS

GreenStream Network Oy
Address: Eteläranta 12, FIN-00130 Helsinki, Finland
Contact Person: Mr Tommi Tynjälä, Executive Vice President
Phone: +358-40-840 8003
Fax: +358-9-4780 1112
E-mail: tommi.tynjala@gsn-trade.com
Website: www.gsn-trade.com

GreenStream Network Oy (GSN) is a Finnish company offering advisory, brokerage, financial and
other services related to emissions trading, greenhouse gas offset projects, such as JI and CDM, and
renewable energy certificates. GSN is a member of the International Emissions Trading Association
(IETA).

From the climate change point of view GreenStream Network Oy’s particular strengths are in-depth
knowledge of the functionality of climate-related market based mechanisms, such as the Kyoto
Mechanisms (ET, JI and CDM) and regional and national trading schemes (the EU-scheme and
others). GSN’s continuous activities on greenhouse gas markets as brokers gives it on-line market
information on actors, volumes, prices, trading schemes and trading rules. This provides a good
basis for offering advisory services for climate change strategies, renewable energy strategies,
expert advice for planning and implementing emissions and certificates trading schemes and
services for JI (Joint Implementation) and CDM (Clean Development Mechanism) project
preparation and implementation (e.g. GHG emission inventories and baseline studies). GSN
participates in the National Country Team in the EU-funded project “Baselines for Accession States
in Europe” (BASE).

GSN staff of ten professionals has several years of both private and public sector experience in
CDM and JI project development, emissions trading, climate change related advisory, and
international climate change negotiations. GSN has offices in Helsinki, Finland and Oslo, Norway.

Biomass Users Network – Centroamérica (BUN-CA)

Address: Apartado Postal: 573-2050, San Pedro Montes de Oca,
San José, Costa Rica
Contact Person: José María Blanco
Phone: (506) 283-8835
Fax: (506) 283-8845
E-mail: jblanco@bun-ca.org
Website: www.bun-ca.org
BUN-CA is the Central American regional office for Biomass Users Network (BUN), which is an
international not-for-profit organization. BUN-CA’s mission is to contribute to the development and
strengthening of Central America’s capacity to increase its production through sustainable use of
natural resources, in order to improve the quality of life of its inhabitants, especially in rural areas.

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BUN-CA implements projects and services in three areas: renewable energy, energy efficiency and
sustainable agriculture.

Pohjolan Voima Oy
Address: P.O. Box 40, FIN-00101 Helsinki, Finland
Contact Person: Mr Juha Poikola, Director, Biofuels
Phone: +358-9-6930 6278
Fax: +358-9-6930 6555
E-mail: juha.poikola@pvo.fi
The Pohjolan Voima Group is a privately owned energy group producing and providing electricity,
steam and district heating for its shareholders. The Pohjolan Voima Group also offers energy sector
services to its customers in Europe, mainly in Finland and neighboring countries.

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